Japan - December 2019S P OT L I G H T
Savills Research2019 Review and2020 Prospects

2019 Review and 2020 Prospects

Moderate property upswing continues
INTRODUCTION
In the face of both global and domestic
macro headwinds, the Japanese real estatemarket performed well in 2019. Enduring
political and economic stability – bolsteredby low interest rates and a competitive yield
gap – continue to promote an attractive
environment for real estate investment. The
defensive nature of prime assets in Japan
appears to be a key draw, especially in the latestage of a property cycle that is shadowed by
global uncertainty.
As early as 2015, market participants began
showing concern over large office supply
scheduled to enter the Tokyo market, fearing
an abrupt end to what would have been ashort-lived upswing. However, these fears
proved to be largely unfounded as, despite
historically high supply levels in both 2016
and 2018, no major secondary vacancy has
materialised thus far, and supply through2020 has been mostly pre-leased. With
the existing market experiencing air-tightconditions, there are no immediate concerns
regarding the performance of hard assets.
Office property prices are approaching2008 levels, though high valuations still
appear justifiable in light of solid underlying
fundamentals. Cap rates are much lower
than the previous peak, but the government
bond interest rate is 150 basis points (bps)lower and the yield spread is even healthier,at almost 300 bps. Prime office rents havegrown steadily, yet still stand around 70-75%

of the previous peak. This may leave roomfor further upside potential - with limited
downside risk.
Japan’s economic and politicalenvironment continues to appear sound,particularly when compared to that of global
peers. To wit, despite significant demographic
headwinds, Japan’s economy has been steadily
growing since 2012, with real GDP growth
per capita 1 from 2012 to 2017 increasing 2.3%
per annum, the highest among the G7, basedon IMF and BOJ data. Further, Japan has
essentially achieved full employment, andyouth unemployment is the lowest amongmajor economies. Domestic corporations andhouseholds are cash rich, supporting a lowinterest rate and giving comfort to investors.
Japan has enjoyed political stability for thesame reasons.
The solid financial performance of Japan
Inc. is underpinning robust demand for
office space. Indeed, the profitability ofdomestic corporations has significantly
improved since the advent of Abenomics.
For instance, the recurring profit marginof large companies2 increased from 3.3% to8.2% through the decade as of fiscal 2018.
This robust performance has been attained inspite of a labour shortage, prompting Japan
Inc. to deploy its winnings to secure prime
office locations as a means of attracting andretaining workforce.
A degree of upside may still be had,
1 PPP, working-age population based
2 Firms with capital of over JPY1 billion

GRAPH 1: Tokyo Grade A Office Net Yield, 2005 to Q3/2019
10-year JGB Yield

Grade A Office Cap Rate

6%
5%
4%
3%
2%
1%
0%
-1%
2005 2006 2007 2008 2009 2010 20112012 2013 2014 2015 2016 2017 2018Q3/2019
Source Ministry of Finance, Savills Research & Consultancy

savills.co.jp/research2albeit with limitations. Even amidst a
declining population, Japan’s workforce
has grown since 2012, primarily becauseof higher labour participation among
women and the elderly. A further increaseis possible, but participation rates among
the aforementioned groups are now at highlevels. Corporations have paid higher rents
as strategic investments for recruitment,
but some have become more cost-conscious
in light of macro conditions, considering
relocation to more affordable areas. Indeed,
the financial capacity of tenants is being
tested.
Japan Inc. has not been immune to theongoing trade conflict among the U.S. andChina. While still at historically high levels,
overall profits have fallen over the last four
quarters as demand slows on a global scale.
More encouragingly, the capital markets
have reignited once again. However, it is
too early to determine whether the global
economy will return to a growth track.
On the domestic front, the impact of theconsumption tax hike implemented in
October has yet to be fully understood.
Despite these macro concerns, an
expanding pool of overseas capital ispursuing investment opportunities in Japan.
With interest rates at effectively zero on
traditional fixed-income vehicles, pension
funds are particularly desperate to increase
allocation to core real estate. There are
multiple catalysts for long-term growth inTokyo and other major cities beyond the2020 Olympics. Incoming integrated resorts,
the World Expo in 2025, mag-lev trains, andmega mixed-use development projects are
all positive for the macro economy and realestate markets.
Property is not the only asset class todraw overseas interest, however. With
ongoing reforms in domestic corporate
governance, inward foreign direct
investment stock has doubled over the last
five years to JPY30 trillion. The fact thatJapan continues to display steady economic
growth and political consistency is anadditional boon for inbound investors.
To be sure, macro headwinds are rising;
however, Japan Inc. is well positioned toweather a correction. To wit, Japanese
corporations have JPY500 trillion (US$5
trillion) in cash and 60% of listed companies
are effectively debt free. The property
upswing is already well extended, but bullish
momentum may persist for the time being.
Given the financial position of domestic

2019 Review and 2020 Prospects

corporations and households, the Japaneseproperty sector should be in for a much
milder chill when winter comes.
INVESTMENT TRENDS
Cap rate tightening continued in 2019,
though changes were noticeable in some
sectors more than others. Prime Tokyo
office cap rates continued their downward
trajectory, compressing to around 2.7%,
while premiums of regional office markets
have started to fall as investors searchfor value. Against a backdrop of elevatedvaluations and limited opportunities,
however, transaction volumes have declined.
According to RCA, as of Q3/2019, total

Amidst global macro headwinds,
Japanese real estate continues to
exceed overall expectations.
2020 prospects are positive,
though more clouds are gatheringon the horizon.

GRAPH 2: Recurring Profit Margin Of Japanese Corporations, 2005 to 2018
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source Ministry of Finance, Savills Research & Consultancy

GRAPH 3: Investment Volumes And Cross-border Share, 2007 to Q3/2019
Residential

RetailHospitality

Logistics

Other

Total (RHS)
10.0

90%

9.0

80%

8.0

70%

7.0

60%

6.0

50%

5.0

40%

4.0

30%

3.0

20%

2.0

10%

1.0

0%

0.0

JPY TRILLIONSPROPORTION OF INVESTMENT

Office100%

Source RCA, Savills Research & Consultancy

3

investment in Japanese real estate equatedto around JPY3.0 trillion year-to-date(YTD) – broadly in line with the same period
last year. Once again, the majority of flows
went into the office sector, whilst Tokyo
was the most in-vogue market. Additionally,
cross-border investment rebounded fromits decline in 2018, increasing by 12% a year
later. This figure is expected to further
increase on the back of sizable transactions
such as Allianz’s JPY129 billion deal forBlackstone’s residential portfolio, as wellas the latter’s JPY100 billion acquisition of
Mapletree’s logistics portfolio. Still, despite
the robust demand, affordable deals arelimited.
The theme of global uncertainty looks
set to continue into 2020. Yet, amid thedisorder, the economic and political stabilityof Japan stands out. In fact, this sentiment
was recently echoed in an annual investor
survey by the Urban Land Institute, where
Tokyo was ranked second for real estate
investment prospects in the Asia Pacificregion, behind only Singapore. Macro
headwinds notwithstanding, the Japanesereal estate market, therefore, remains
appealing. Fundamentals are sound, and theavailability of attractive financing continues
to lure investors. Furthermore, the BOJ’s
stealth tapering of JGB purchases should
allow for more leeway if further monetarystimulus becomes necessary. That said,
rental growth has started to slow, showing
signs that this extended cycle may finallycome to an end. Yet, provided the world
economy does not take an abrupt turn, therise in capital chasing stable real estate
assets should lead to marginal cap ratecompression in 2020.

2019 Review and 2020 Prospects

GRAPH 4: High-grade Office YoY Rental Growth And
Vacancy Rates, Q3/20192018 Rent

2019 Rent

2018 Vacancy

2019 Vacancy

50,0001.2%
Rent YoY

45,000

6.7%

1.1%

7.8%

4.5%

1.0%
0.9%

35,0000.8%

0.8%

30,0000.7%
0.6%

25,0000.6%

20,0000.5%

15,0000.4% 0.4%

10,0000.2%

VACANCY

JPY / TSUBO / MONTH

40,000

9.3%

0.3%
0.2%

0.2%

5,000

0.1%

0.1%

0

0.2%
0.1%
0.0%

Tokyo

Osaka

NagoyaFukuoka

Source Savills Research & Consultancy

GRAPH 5: JREI Expected Prime Office Cap Rates By
City, 2003 to 2019
Osaka
SendaiShinjuku

NagoyaMarunouchi
Shibuya

Fukuoka
Roppongi

8.0%

EXPECTED CAP RATE

7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%

1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H

3.5%
3.0%

03 04 05 06 07 08 09 101112

13 14 15

16

17

18 19

Source JREI, Savills Research & Consultancy

GRAPH 6: Office Investment Volumes By Region,
2007 to Q3/2019
Tokyo
NagoyaSendai

Yokohama
Fukuoka
Other

Osaka
SapporoTotal (RHS)
5.0

90%

4.5

80%

4.0

70%

3.5

60%

3.0

50%

2.5

40%

2.0

30%

1.5

20%

1.0

10%

0.5

0%

0.0

JPY TRILLIONS

100%

Source RCA, Savills Research & Consultancy

savills.co.jp/research

OFFICE
Investment Trends
In a sign of market optimism against
a backdrop of tight market conditions,in-house Tokyo office cap rates havecompressed by 20bps to 2.7% in 2019.
According to the October 2019 survey
conducted by Japan Real Estate Institute(JREI)1, expected cap rate premiumsin Osaka, Nagoya, and Fukuoka standat roughly 80bps, 110bps, and 110bps,
respectively, a tightening of around 10bps
on last year, as demand for regional assets
continues to grow.
As of Q3/2019, YTD investment
into the office market in Japan wasapproximately JPY1.4 trillion, around
5% less than the same period last year. It
appears the market has, to some extent,
stabilised as investors err on the side of
caution. Needless to say, Tokyo is themain destination of investment funds inthis sector (Graph 6), accounting for over
80% of transaction volumes.
Review and Prospects
Tokyo is currently going through asignificant expansion of office stock, mostof which is expected to be completed
come 2020. Thereafter, the number ofprojects is expected to fade until 2023.
Despite this short-term surge in supply,
low vacancy rates, in concert with solid
pre-leasing, has resulted in rent growthquickening in 2019. In fact, the capital was
the sole region to experience an increasein the rate of growth year-on-year (YoY),
and now outpaces Fukuoka. Given thetight market conditions explained above,
as well as the lack of suitable alternatives,
rents are expected to continue rising,albeit the pace of growth may slow
somewhat as the financial capabilities oftenants are tested. Grade B, on the other
hand, with its limited supply, is expected
to keep benefiting from the relative
affordability compared to Grade A.
In the regional markets, performance ofhigh-grade offices continues to be robust.
Rents climbed over 7% YoY on average,
underpinned by air-tight vacancy acrossall three markets. Looking forward, rental
growth should, despite the pace slowing,
maintain its upward trajectory as demandprevails in the absence of meaningfulsupply expansion.
Having started the year full of
optimism, 2019 has turned out to bea year to forget for WeWork. In theaftermath of the co-working start-up’s
botched IPO, concern has replaced
1 Expected cap rates reported by JREI tend to be looser
than market cap rates.

4

optimism. Unlike in its Westerncounterparts such as New York andLondon, however, Tokyo’s exposure to
WeWork is limited, with approximately
1% of the overall Grade A floor-spacein the central five wards (C5W) leasedby the firm. In addition, the start-up
benefits from its owner and affiliates,
namely SoftBank Group, also being its
largest tenant in Japan. Nonetheless,in light of their previously ambitious
expansion plans, approximately 3% of
new supply for the last two years wasabsorbed by WeWork. Therefore, weshould expect a noticeable pull-backin demand going forward, though theoverall impact should be limited.
A harbinger of change has emergedwith rents reaching levels not seen fora decade despite rental growth slowing.
As a result, there have been some cases
whereby tenants have relocated frompricey prime areas to more affordable
locations. This is not unexpected,
however, given the current stage of theproperty cycle. Nonetheless, economic
fundamentals such as employment andcorporate profits remain supportive of
the present levels of rent. Therefore,
unless an economic downturn were tooccur, rents should remain on an upward
path - especially in regional cities - albeit
not as strongly as before.

2019 Review and 2020 Prospects

GRAPH 7: JREI Expected Residential Cap Rates By
City, 2003 to 2019

9.0%

Osaka
Sendai

NagoyaTokyo: Jonan

Fukuoka
Tokyo: Joto

8.5%
EXPECTED CAP RATE

8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%

1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H

4.5%
4.0%

03 04 05 06 07 08 09 1012

11

13 14 15 16 17

18 19

Source JREI, Savills Research & Consultancy

GRAPH 8: Residential Investment Volumes,
2007 to Q3/2019

100%

Overseas
Listed Companies & REITs
Unknown
Total (RHS)

Equity & Institutional
Private
Other
1,000
900

80%

800

70%

700

60%

600

50%

500

40%

400

30%

300

20%

200

10%

100

0%

0

JPY Billions

90%

Source RCA, Savills Research & Consultancy

Positive Net Migration (No. of People)

GRAPH 9: Total Net Migration, 2014 to Q3/2019
Tokyo 23W
NagoyaSapporoTotal Net Migration (RHS)
80,000Osaka
Fukuoka
Sendai120,000

70,000115,000

60,000110,000

50,000105,000

40,000100,000

30,00095,00020,00090,00010,00085,000080,000
2014

2015

2016

2017

2018

2019
(YTD)

Source Statistics Bureau of Japan, Savills Research & Consultancy

RESIDENTIAL
Investment Trends
In-house cap rates for mid-market
residential property in the 23 wards havecompressed by 20bps to 3.4% from a year
ago. According to JREI, expected cap rates
for residential property in Jonan and Joto
have fallen to 4.3% and 4.5%, respectively,
following a 10bps contraction in theformer and a 20bps tightening in thelatter.
As of Q3/2019, YTD investment inresidential property has increased byover 10% compared to the same period
last year. A noteworthy contributor
to this has been the near doubling ofoverseas investment, which now stands
at a third of total investment (Graph8). In Q4/2019, this figure is expected
to markedly increase following thecompletion of the JPY130 billion deal
between Allianz and Blackstone for thelatter’s Japanese residential portfolio in
October 2019. Additionally, according
to Reuters, Chinese Insurance Group,
Anbang, is looking to dispose of its
property portfolio – the majority ofwhich is invested in residential assets –worth an estimated JPY250 billion. The
scale of these deals, despite the elevatedvaluations, continues to evidence
investors’ attraction to residential assets
in this late property cycle, given its
defensive nature.
Review and Prospects
Despite the ongoing demographic
challenges facing Japan, Tokyo bucks
the trend. The economic hub, given its
prospects for employment, has continued
to experience positive net migration(Graph 9). In fact, Tokyo accounted
for more than half of all migration into
the major cities this year. This theme isanticipated to continue over the longer
term with the population in the C5W, forinstance, expected to expand by up to
20% on average between 2015 and 2045.
The other driver of rent growth, namely
residential market supply, remains tightin the capital, as evidenced by occupancy
rates in both the 23W and the C5W
hitting record highs this year. As a result,mid-market rent growth has been robust
across the board, with the rate of growthin the 23W recently increasing.
Within the residential market, theluxury segment continues to perform
strongly. Demand for these properties
has continued to strengthen despite theongoing global economic uncertainty,
while supply has been slow to catch up. It
appears, however, that developers have5

started to remedy this. Developments
such as the Toranomon-Azabudai
Project, for example, which is slated
for completion in 2023, will see up to
1,400 new rooms, including serviced
apartments.
It seems, therefore, that thefundamental forces driving Tokyo’s
residential market are working intandem, continuing to support solid rent
growth. That being said, with the rise inrents outstripping wage growth, somesegments of the market are beginning tolook relatively pricey as occupier budgets
are stretched. The slowing of rent growth
witnessed in the C5W being case inpoint. Furthermore, there is the risk ofdevelopers, on the back of rising costs,
opting to lease condominiums, adding
to the supply of rental units. Even so,
unless a significant economic downturnwere to occur, the absence of meaningful
mid-market supply expansion, combinedwith the lack of suitable alternatives inTokyo, should see average rents continue
their upward momentum, albeit at a more
moderate pace going forward.

2019 Review and 2020 Prospects

GRAPH 10: JREI Expected Retail Cap Rates By City,
2H/2003 to 2019

9.0%

Osaka

NagoyaFukuoka

Sendai

Tokyo

8.5%

EXPECTED CAP RATE

8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
3.5%
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H

3.0%
0304 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
Source JREI, Savills Research & Consultancy

GRAPH 11: Retail Investment Volumes, 2007 to
Q3/2019

100%

Overseas
Listed Companies & REITs
Unknown
Total (RHS)

Equity & Institutional
Private
Other
2,000
1,800

80%

1,600

70%

1,400

60%

1,200

50%

1,000

40%

800

30%

600

20%

400

10%

200

0%

0

JPY BILLIONS

90%

Source RCA, Savills Research & Consultancy

GRAPH 12: Weighted Average Of Retail Spending
Per Person of the Top Six Visitor Nations, 2018 toSeptember 201912,0002018

2019

YoY Change (RHS)

80%
70%

10,000

60%

9,000

50%

SPENDING (JPY)

11,000

8,000

40%

7,000

30%

6,000

20%

5,000

10%

4,000

0%

3,000

-10%

2,000

-20%

1,000

-30%

0

-40%

Source JNTO, Savills Research & Consultancy

savills.co.jp/research

RETAIL
Investment Trends
Based on our in-house survey, cap rates
for high-street retail in Tokyo havecompressed 20bps to 2.7% over theyear. Expected cap rates for prime retailproperty in Ginza and Omotesando,
according to JREI, have held steady at
3.4% and 3.5%, respectively, while rates in
Osaka slightly tightened to 4.5%.
Investment volumes in the retailmarket have continued to decline, withtotal investment during the first threequarters of 2019 around 28% lower than
the same period last year. That said,
Osaka attracted a significant increasein flows, with the reported JPY21 billion
acquisition of Croesus Shinsaibashi by
Sumitomo Corporation representing
a large chunk of total investments,
implying confidence in the continued
growth of inbound tourism.
Review and Prospects
In Japan, high-street retail remains
popular and the importance of the
shopping experience itself rings true.
As such, retail assets on the first floor
continue to reign supreme, and thedivergence in rents between non-1F storeshas been widening since 1H/2017. In
fact, rents at these prime locations havereached levels not seen since 2008, withplaces such as Ginza commanding northof JPY75,000 per tsubo. The divergenceis also apparent when comparing Tokyoand its regional peer, Osaka. The capitalhas benefitted from being the country’s
economic hub, with annualised rent
growth of 1F and non-1F stores in the city
outpacing its regional rival by 6% and 4%
per year, respectively.
Given the huge boost to the retailsector that inbound tourism provides,
the fallout from the dispute between
Japan and South Korea was an
unwelcome headache. That said, theweighted average of spending by the
top six countries of origin, which makeup close to 80% of total visitors, hasgrown YoY despite the large drop in
Korean tourists. In fact, Chinese tourists
significantly outspent their Koreancounterparts, more than offsetting
any losses, and this trend may grow inimportance going forward.
Retailers experienced a 9.2% YoY
pick-up in sales in September prior tothe consumption tax hike. According
to retail sales data released recently,
sales in October, however, declined
by 7.1% YoY – significantly worse than
expected – despite the Government’s

6

counter-measures. Though these figures
were further dragged down by extreme
weather conditions, the marked change
in consumer habits following the tax
hike cannot be ignored. The worse hit
sectors were big-ticket items such as cars(-17.0%) and machinery (-15.0%), whilst
F&B appears to have been left relatively
unscathed (-2.2%), perhaps offset by the
Rugby World Cup.
Although the impact of the tax hikestill needs to be fully understood, theeffects witnessed thus far are neither
promising nor particularly dire.
Nonetheless, investment appetite inretail assets remains strong – the recent
takeover of Tiffany by LVMH being casein point. Closer to home, PGIM Real
Estate has reportedly disposed of the
Abercrombie & Fitch Company’s flagshipstore in Ginza for up to JPY400 million
per tsubo of land.
Despite facing difficulties on multiple
fronts this year, the retail sector in Japanremains resilient. This is especially truefor 1F stores. As such, the shift towards
the consumer experience means someretail facilities are ready to satisfy
consumer needs. Regardless, there areheadwinds aplenty: the consumption
tax hike and the continued growth of
e-commerce being two key risks. Thatsaid, the continued growth of inboundtourism, has the potential to overcome
these obstacles for the time being.

2019 Review and 2020 Prospects

HOTEL

GRAPH 13: Hotel Investment Volumes, 2007 to
Q3/2019

100%

Overseas
Listed Companies & REITs
Unknown
Total (RHS)

Equity & Institutional
Private
Other
1,000
900

80%

800

70%

700

60%

600

50%

500

40%

400

30%

300

20%

200

10%

100

0%

0

JPY BILLIONS

90%

Source RCA, Savills Research & Consultancy

GRAPH 14: Average Hotel REIT Performance,
2019YTD*
125.0

Hotel REIT Average

TSE REIT Index

122.5

INDEX (4 JAN=100)

120.0
117.5
115.0
112.5
110.0
107.5
105.0
102.5
100.0

Source J-REIT Disclosures, Japanese Exchange Group,
Savills Research & Consultancy*Market data between Q1-Q3/2019.

GRAPH 15: Hotel Guest Room Supply, 1982 to 2021

Guest Room Supply (LHS)% Change in Stock (RHS)
60,000

Historical Avg.

12%50,00010%

40,0008%30,000
6%
20,0004%

10,000

2%

0

0%

1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Est. 2018
Est. 2019
Est. 2020
Est. 2021

GUEST ROOMS

14%

Source Hoteres, news articles, the Ministry of Health, Labour andWelfare, Savills Research & Consultancy

Investment Trends
According to JREI, as of October,
expected cap rates for limited-service
hotels in Tokyo have compressed by 10bps
to 4.4%. This was also the case in theregional markets. Actual cap rates tend to
be 50-100bps lower than these expected
rates.
As of Q3/2019, investment volumes
into the hotel market increased byaround 20% relative to the same period
last year. Investment appetite fromoverseas investors appears to havereturned somewhat, with volumes YTD
exceeding investment during the wholeof 2016 and 2018.
Review and Prospects
With the expansion of the global economy
in general, and the Asian economy inparticular, inbound tourism to Japan has
increased substantially. As of September,the number of visitors stood around 25
million YTD – a 4% increase comparedto the same period last year. The pace ofgrowth, however, appears to be slowing.
Systematic risks abound in the hotel
market, with this year being no different.
Having already experienced Typhoon
Faxai at the start of September, Octobersaw Typhoon Hagibis devastate the
Kanto region, with thousands of flights
and hotel reservations subsequently
cancelled. Additionally, the dispute with
Korea, which commenced in Q3/2019, has
impacted the number of Korean visitors
to Japan – who accounted for around 25%of all inbound tourists in 2018. According
to the Japanese National Tourism
Organisation (JNTO), the number of
Korean visitors declined by 36% YoY in
Q3/2019. The impact, however, is mostfelt in Fukuoka, given 40% of all visitors
to Fukuoka airport come from South
Korea. For Osaka Airport, this figure isaround 15%.
The combination of these systematic
risks, along with concerns of large supply
in the market, has somewhat weighedon the recent performance of mostbudget hotels. For example, Ichigo Hotel
REIT reported that occupancy levels
had fallen to 83.4% in September 2019,
while average revenues per available
room declined by 10% YoY in Q3. Incomparison, between January and June,
the average YoY decline was 1.5%. As aresult, the average performance of thefive main hotel REITs, having moved inlockstep with the broader REIT index formost of the year, has recently diverged,

7

with the spread widening towards theend of Q3 as market sentiment weakened(Graph 14). Even as budget hotels
struggle, however, the luxury hotel
market, which remains short-supplied,
continues to perform well.
With employment near full capacity,
cost pressures from higher wages arestarting to weigh on the sector. This isespecially true for thinly capitalised,
inexperienced operators who entered
the market in 2014 and 2015. We could,
therefore, see these struggling businesses
plan an exit from the industry, giving
long-term investors the chance tomake an opportunistic play in the
sector. Regardless, inbound tourism
continues to act as a major tailwind,with the increasing spending powerof tourists, especially from the West
and China, revitalising the hospitality
sector. Furthermore, the success of therecently concluded Rugby World Cup
demonstrates Japan’s potential as an
attractive destination for a wider range ofvisitors. The upcoming Olympics, as well
as planned Integrated Resorts and the2025 Expo, should build on this theme.

2019 Review and 2020 Prospects

GRAPH 16: JREI Expected Logistics Cap Rates By City,
2005 to 2019
Tokyo - Bayside
8.0%

Osaka - Inland

NagoyaFukuoka

EXPECTED CAP RATE

7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%

1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H

4.0%
05 06 07 08 09 10 11

12 13 14 15 16 17 18 19

Source JREI, Savills Research & Consultancy

GRAPH 17: Logistics Investment Volumes, 2007 to
Q3/2019

100%

Overseas
Listed Companies & REITs
Unknown
Total (RHS)

Equity & Institutional
Private
Other
1,000
900

80%

800

70%

700

60%

600

50%

500

40%

400

30%

300

20%

200

10%

100

0%

0

JPY BILLIONS

90%

Source RCA, Savills Research & Consultancy

GRAPH 18: Average Logistics REIT Performance,
2019YTD*
J-REIT Logistics Index

TSE REIT Index

140.0
135.0

INDEX (4 JAN=100)

130.0
125.0
120.0
115.0
110.0
105.0
100.0

Source J-REIT Disclosures, Japanese Exchange Group, Savills
Research & Consultancy*Market data between Q1-Q3/2019

savills.co.jp/research

LOGISTICS
Investment Trends
According to JREI’s October 2019 survey,
expected cap rates remained somewhat
steady in most markets over the year.
The Tokyo bayside area held firm at
4.5%, while Osaka saw a 10bps narrowing
to 5.0%. Actual transaction cap rates,
however, may be about 100 bps tighter.
As of Q3/2019, YTD investment inindustrial property amounted to JPY317
billion, broadly in line with the same
period in 2018. Yet, overseas investment
flows have declined by around 30%
as demand softened during 1H/2019.
That said, investment appears to havepicked up in 2H/2019 as evidenced by the
JPY100 billion deal in July 2019 between
Blackstone and Mapletree for the latter’s
industrial portfolio.
Review and Prospects
Tokyo witnessed unprecedented levels of
new supply in 2018, and this has continued
into 2019, leading to market conditions
softening in 1H/2019. Even so, the market
remains tight and vacancy rates continue
to be low, following stronger-thanexpected demand, as also observed in
the office sector. This, however, has notbeen reflected in average rents. Supply has
mainly consisted of the more affordable
inland facilities, compared to prime assets
in the Bay Area where rental growthis strong, but availability is limited.
Following a glut in 2017, supply appears tohave moderated in Osaka. Indeed, vacancy
rates have responded to the robust levelsof demand, contracting by over 7.0
percentage-points (ppts) YoY. Unlike its
regional competitor, however, rents have
responded accordingly, increasing byaround 7.0% YoY.
Having witnessed the introductionof two new logistics J-REITs last year,
December 2019 welcomed another new
player to an already crowded market,
namely the SOSiLA Logistics REIT.
Although there have been many false
starts in the J-REIT IPO market in recent
years, SOSiLA REIT's launch appears
to be a success thus far. In addition,
the sponsor, Sumitomo Corporation,
has plans to develop two new sites
located in Osaka and Kanagawa. Slated
for completion in 2021 and 2022,
respectively, these facilities are reported
to have a combined GFA of around
200,000 sq m. SOSiLA is not alone on
the development front, however. For
instance, GLP Japan has announcedplans to commence construction of the
GLP Alfalink Sagamihara facility with

8

a GFA of 650,000 sq m – the largest
in Japan – in February 2020, at a costof JPY140 billion. Indeed, the growthin supply appears to have legs for theforeseeable future.
As the logistics sector garners more
attention, increased demand for thesector has also been observed in thestock market. For instance, returns oflisted logistics J-REITs have significantly
outperformed the broader REIT index(Graph 18). To wit, average growth
YTD of the Logistics J-REIT index has
outpaced its comparator by over 12%,taking the title of best performing
sector this year. Indeed, supported by
the global low-interest environment,
J-REITs exceeded market expectationsin 2019. This robust performance in thecapital markets should bolster hardasset purchasing power moving forward,
with logistics J-REITs in a particularly
advantageous position.
Despite the expected influx of supply,
rents should remain fairly stable given
the significant demand anticipated, as
evidenced in the preleasing market.
In fact, the long-term prospects of themarket appear strong, especially when
considering the relatively low levels of
e-commerce penetration observed inJapan. That said, cost pressures arisingfrom labour shortages could impact thesector, though technological innovations
to improve efficiency should alleviate thepain somewhat.

2019 Review and 2020 Prospects

GRAPH 19: J-REIT Healthcare AUM By Acquisition
Value, 2013 to 2019*

200

1.0%

180

0.9%

160

0.8%

140

0.7%

120

0.6%

100

0.5%

80

0.4%

60

0.3%

40

0.2%

20

0.1%

0

0.0%
2013

2014

2015

2016

2017

2018

% OF TOTAL J-REIT AUM

JPY BILLION% of Total J-REIT AUM (RHS)

AUM

2019

Source ARES J-REIT Databook, Savills Research & Consultancy*2013 – 2018 values are as of 31 December for the respective years.
2019 values are as of 31 October.

GRAPH 20: Acute Care Length Of Stay And Bed
Utilisation Rate, FY2010 to FY2017*
Bed Utilisation Rate (LHS)
20

77.5%

19

77.0%

18

76.5%

17

76.0%

16

75.5%

15

75.0%

14

74.5%

13

74.0%

12

73.5%

11

73.0%

10

DAYS

UTILISATION RATE

Average Length of Stay (RHS)
78.0%

Source Ministry of Health, Labour, and Welfare via the Welfare
and Medical Service Agency*Fiscal years from 1 April to 31 March.

GRAPH 21: Regional Allocation Of Data Centres, 2019

Other, 21.6%

Greater Nagoya,
10.2%

Greater Tokyo,
50.2%

Greater
Osaka, 18.0%

Source Japan Data Centre Council, Savills Research & Consultancy

ALTERNATIVE ASSETS
Investors searching for higher yields
continue to be drawn to alternative asset
types in Japan. Assets in sectors suchas healthcare, data centres, and student
housing continue to gain traction, as
opportunities become increasingly sparsein traditional sectors. Investor interest is
steadily picking up as some large players
enter the arena and new opportunities
emerge. Even so, these sectors are still
nascent and opportunities at institutional
investment scale remain extremely
limited.
Healthcare
With ironclad demand fundamentals
driven by Japan’s rapidly aging society, thehealthcare sector is attracting increasing
attention from foreign investors.
Although investment volumes picked
up in 2019, the sector still accounts
for a miniscule portion of real estate
investment. Indeed, healthcare assets
still account for only 1.0% of J-REIT AUM
by acquisition volume, though this isaround 0.2 ppts higher than at the end oflast year. As the medical and nursing careindustries remain fragmented, achieving
appropriate investment scale can bechallenging, limiting opportunities for
institutional investors. Larger mixed-use
complexes are therefore a popular target
in the sector.
In February 2019, the Healthcare
and Medical Investment Corporationacquired the Ship Senri Building, a mixed
medical services facility offering 400
hospital beds and 181 private residential
units, for JPY12.9 billion – the largest
single healthcare asset ever transacted by
a J-REIT. Other common mixes include
fee-based nursing homes with outpatient
medical clinics, nursery schools,
pharmacies, or supermarkets occupying
the lower floors.
Some investors have turned toconsolidation in order to achieve scale.
Japan Senior Living merged with
Kenedix Residential REIT in March
2018, transferring its 15-asset portfolio
to the rebranded Kenedix Residential
Next. In November 2019, Nippon
Healthcare Investment Corporation andJapan Rental Housing Inc. announced amerger to form Daiwa Securities Living
Investment Corporation. These mergers
allow healthcare REITs to achieve scale
immediately, while residential REITs canmore easily and efficiently add accretive
assets to their portfolios.
Even if acquisition opportunities

9

emerge in the sector, however, concerns
regarding the sustainability of thehospital business model are weighing
on investment prospects somewhat.
Improvements in efficiency will be key toeasing such concerns.
One area that has seen improvement
is the number of days spent per patientin acute care, which has declined from 18
days in 2010 to 16.2 days as of 2017, evenwhile bed utilisation rates have picked
up since 2014 (Graph 20). Higher patient
turnover leads to higher profitability, as
revenue per patient tends to decline thelonger a patient spends in the hospitalfollowing surgical or other acute care
procedures.
As this figure is still well above theOECD average of around 6.8 days per
patient in acute care, there remains
significant room for improvement.
Moving forward, hospitals will ideallyserve to provide emergency andspecialised acute care, while long-termcare facilities can accommodate thosewith chronic conditions that requireless-intensive monitoring. Government
insurance pay-outs are also adapting
in order to facilitate this transition.
This synergy is also why facilities that
integrate nursing care and hospitalfunctions tend to be more attractive toinvestors and patients alike.
To be sure, the healthcare real estatemarket is still finding its legs. However,demand for nursing care and medical
services only stands to grow for at least
the next two decades. As such, thoughsomewhat risky, early entrants may havethe potential to gain a valuable foothold
before the market heats up.
Please see our November 2018 “Japan
Healthcare” report for a more in-depth
analysis of the market.
Data centres
Japan’s data centre market has historically
been dominated by domestic telecom
and network solutions providers, suchas NTT, Fujistsu, Hitachi, and NEC.
However, driven by the expansion of
global cloud services into the country,
major international players such as Digital
Realty, Equinix and Colt DCS are actively
deploying sizeable facilities in major
metropolitan areas.
In Greater Tokyo, Inzai City has
emerged as a hub for large-scale data
centres. Colt DCS, for instance, has acampus with two facilities in the area andis planning to complete the third, andits largest facility in Japan, by the end of

2019 Review and 2020 Prospects

GRAPH 22: Forecast Data Centre Services Market
Value By Region, 2018 vs. 2023
Greater Tokyo
3,500

Greater Osaka

Other Regions

3,000

9.3%

JPY BILLION

2,500
2,000

62.3%

1,500
1,000

33.7%

500
0
2018E

2023F
Source Fuji Chimera Research Institute,
Savills Research & Consultancy

GRAPH 23: Number of International Students inJapan, FY2011 – FY2018 & FY2020 goal
Higher Education

Language Program

350,000
300,000
250,000
200,000
150,000
100,000
50,0000

Source Japan Student Services Organisation,
Savills Research & Consultancy

GRAPH 24: Domestic Undergraduate Enrolment,
FY2010 to FY2019
Total Enrolment Rate

Female Enrolment Rate
60.0%

3,000

57.5%

2,975

55.0%

2,950

52.5%

2,925

50.0%

2,900

47.5%

2,875

45.0%

2,850

42.5%

2,825

40.0%

2,800

THOUSANDS OF STUDENTS

RATE OF ENROLMENT

Students Enrolled (RHS)

2020. In fact, the firm reportedly sold out
the capacity in its Inzai 2 facility withinnine months of its completion in May
2018 and expects even stronger demandfor its upcoming project, which has
nearly double the capacity.
The expansion of the data centre
market is not limited to Tokyo, however.
According to the Fuji Chimera ResearchInstitute, the data centre services market
is expected to expand by 35% from 2018
to 2023, with the largest rate of growthoccurring in the Greater Osaka region(Graph 22).
Following a deployment in Tokyoin 2016, Google successfully launched
its second Japanese cloud region in
Osaka in May 2019. Other global cloudservice providers, such as Microsoft,
have already established cloud regions
in Osaka and other players appear set to
expand there as well.
While Japan is geographically dense
and, therefore, two cloud regions maylead to some redundancy, business
continuity planning considerations haveencouraged service providers to disperse
their capacity in order to support disasterrecovery. Osaka in particular is serving
as a popular backup destination forTokyo-based companies.
On the other hand, co-location
data centres must be located in close
proximity to their clients, as techniciansneed to be able to access locations
quickly in the event of emergency
maintenance or breaches of their servers.
Also, though locations further from thecity centre offer more space at lower
cost, they generally require longer leadtimes to connect the appropriate energy
and fibre-optic infrastructure. This hasreportedly made it difficult for cloud
operators to secure the land needed todevelop their own facilities.
Regardless of the hurdles, with cloud
operators expanding aggressively and theadvent of 5G technology on the horizon,
the sector is becoming a major target
for real estate investment across the
Asia-Pacific region. As the world’s thirdlargest economy, with relative politicalstability and data security, Japan willcontinue to be an attractive deployment
zone for major cloud service providers,
while domestic telecom’s commitment toa swift rollout of 5G services will require
more capacity to handle the resulting
boom in data.

Source Ministry of Education, Culture, Sports, Science andTechnology, Savills Research & Consultancy

savills.co.jp/research

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Student Housing
Despite the fact that Japan’s population isaging, positive trends among the country’s
student population are encouraging
developers and investors to embrace thestudent accommodations sector.
The number of international students
in Japan has grown at an average annual
rate of 10.8% since 2013, with the total
as of FY2018 sitting just below thegovernment’s 2020 goal of 300,000
students (Graph 23). This influx ofstudents has continued to drive demandfor private accommodation in locationsin close proximity to universities.
Although the number of international
students should continue to growover the long term, growth may slow
somewhat in the near term as a resultof the government’s recent decision
to impose tougher rules, specificallyregarding the enrolment of foreign
nationals after a Tokyo-based university
lost track of 1,500 international students
who overstayed their visas.
International students are not the
only driver of student housing demand,
however, as domestic enrolment inhigher education is picking up in spite of
demographic headwinds. Indeed, evenwhile the 18 to 22 year old population has
declined, both enrolment rates and thetotal number of enrolled students havereached historic highs, mainly driven bya strong increase in female enrolment(Graph 24).
Domestic developers have caught
sight of these demand trends, with big
names such as Mitsui, Tokyu, and Itochu
announcing entries over the past three
years. As with the healthcare sector,
however, the market is still small andthere are few entry points for larger
investors. More opportunities should
emerge as student demand grows,
operators consolidate, and developers
reinvigorate the subsector.

2019 Review and 2020 Prospects

OPPORTUNITIESA growing amount of capital is chasing
global real estate, and the Japanese market
has recently been drawing more interest,
appearing as a fairly stable bet in a world miredin uncertainty. Hard assets became even more
attractive as central banks made a dovish turnacross the globe, indicating a continuation of
the low interest environment and bolstering
J-REIT unit prices to high levels. Leveraging
these prices, J-REIT transaction volumes arelikely to increase in 2020. The low-interest
environment has also squeezed the returns ofmajor pension funds, which must now allocate
more capital to real estate in order to generate
the yields necessary to meet obligations topensioners. Against this backdrop, the below
represent some of our views on investment
strategies for Japanese real estate.
Core and Core-plus
At this late stage of the property cycle, Core
and Core-plus have probably been the mostpopular investment targets and competition
for such assets is therefore the fiercest. As aresult, prospective investors face high ticket
prices and are struggling to find affordable
opportunities in an already-narrow field.
Defensive in nature, multi-family residential
assets remain very popular. Grade A/B offices
in Tokyo, as well as major regional offices,
continue to attract attention. Rents are steadily
growing, but cap rates are highly compressed.
Yet, the yield spread looks somewhat healthy
and justifiable, due to lower interest rates.
Value add
Logistics facility performance softened
temporarily through 1H/2019, with a historicallyhigh level of supply in both Tokyo and Osaka.
Even so, driven by rapid growth in e-commerceand 3PL services, demand for new facilities
turned out to be much stronger than originally
expected, prompting major investors to target
the sector in the second half of the year. With
e-commerce penetration still lower than among

global peers, the sector should continue togrow and fuel demand for advanced logistics
facilities, which still account for only a small
percentage of the industrial market.

in October, though it is too early to tell, theoverall impact seems somewhat manageable.
That said, it could, at the very least, dampen
market sentiment in 2020.

Opportunistic
Inbound tourism to Japan has exploded overthe past several years, drawing significant
investor attention to the hospitality sector.
Backed by this compelling demand story, sellers
have been unsurprisingly bullish. However, an
exceptionally large amount of supply coming
online recently has led to some saturation.
This has been compounded this year by Japan’s
dispute with South Korea, which has led to a
precipitous drop in visitors from the peninsula.
Despite the above, the long-term outlook for
inbound visitation is positive.
On the operating side, a shortage of labour
has led to rising costs, and there have been
many new, inexperienced firms with low credit
entering the market since 2014. Consideringthat the market is softening temporarily
and that there is potential to improve hotel
performance with operational acumen, 2020
might be an excellent entry opportunity, as
underperforming hotels could be snapped up at
a relative bargain. Also, subject to the outcomeof the Unizo takeover, portfolio acquisitions
through platform acquisitions and corporatetransactions may become more common.

Overseas risks
The global economic and political climate is
becoming more uncertain. Though Japanis relatively insulated from current global
issues, the U.S.-China trade dispute is
disrupting supply chains and slowing the world
economy. Corporate activity has slowed acrossthe globe as a result and financial forecasts
have been revised downward. Japan has beenno exception in 2019. To be sure, Japan Inc.’s
performance is still at a historically high level,
but revenues and profits have decreased forthe last four quarters. As the current upswing
is very well extended, lingering turmoil
could lead to a sudden reversion in property
markets. Finally, geopolitical risks continue toloom larger in East Asia. Unrest in Hong Kongis just the tip of the iceberg: if tensions in East
Asia should reach a breaking point, however
unlikely, the outcome would reverberate
across the region - Japan included.

RISKS
On a long-term basis, Japan faces substantial
challenges such as a declining population andexcessive government debt. On the other hand,the country’s stability stands out, especiallyamongst the backdrop of global turmoil.
Indeed, with a stable government andconsistent economic policy, Japan continues
to avoid major social disruption. The central
bank’s stealth tapering is extending thelife of loose monetary policy. We do notsee any imminent domestic risks. Rather,
global uncertainty may affect the Japanesemarket and abruptly alter its direction.
Regarding the consumption tax hike enacted

Interest rates
The prospect of higher interest rates appears
less and less likely. The U.S. has a relatively highinterest rate among developed economies, but
still maintains rates at a historically low level,with additional hikes unlikely in the near term.
Some European countries are seeing interest
rates even lower than those of Japan. In thisenvironment, Japan’s interest rate should
remain low, especially as 1) Japan Inc. has a
stash of JPY500 trillion cash on hand, 2) 60%
of listed companies in Japan are effectively
debt-free, and 3) Household debt is moderate,at or below 60% of GDP. All of the above lead toweak cash demand in Japan. As such, we expect
only mild, if any, increases in interest rates in
the near future. Of course, Japanese interest
rates are not independent from global rates,and shifts in the global rate environment may
adversely affect the domestic market.

For more information about this report, please contact us
Savills Japan

Savills Research

Christian Mancini
CEO, Asia Pacific(Ex. Greater China)+81 3 6777 5150
cmancini@savills.co.jp

Tetsuya Kaneko
Director, Head of Research& Consultancy, Japan+81 3 6777 5192
tkaneko@savills.co.jp

Simon Smith
Senior Director
Asia Pacific+852 2842 4573
ssmith@savills.com.hk

Savills plc: Savills plc is a global real estate services provider listed on the London Stock Exchange. We have an international network of more than 600 offices and associates throughout the Americas, the UK,continental Europe, Asia Pacific, Africa and the Middle East, offering a broad range of specialist advisory, management and transactional services to clients all over the world. This report is for general informative
purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. While every effort has
been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form
is prohibited without written permission from Savills Research.

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